Why is inflation low and steady?

While some debate whether QE is causing low inflation… there is a practical view of low inflation from an article written by Chun Wang at Advisor Perspectives.

Here are some excerpts…

“A key factor allowing the Fed to maintain QE is the lack of inflation. You would think after multiple rounds of synchronized global money printing and a recovering global economy that inflation would be felt in more noticeable ways. But the reality is, among the G4 and major emerging countries, only Japan is creating inflation (Chart 1). Even emerging countries have seen inflation weaken in the last few months (chart not shown). The lack of inflation is global in scope, not just within the U.S.”

“In the U.S., inflation is not much better either. At both the consumer and producer levels, inflation is weakening, not strengthening (Charts 2 & 3). This is puzzling because the Fed is one of the most accommodative central banks in the world, and the U.S. economy is in a better shape than most other countries.”

The lack of inflation is actually encouraging QE. It is not that QE is causing low inflation.

And by the way, the inflation in Japan will be temporary because wages there have now dropped 17 months in a row. (source) Corporate profits increased more than 24% in the 3rd quarter and the corporations will receive a tax break. The Prime Minister of Japan is encouraging the companies to raise base wages. We will see. The companies say that international competition makes it hard to raise base wages.

Back to the article by Chun Wang…

“First, overall demand slack is a key contributor to the absence of inflation.”

He uses capacity utilization as a proxy for demand, but it is much better to use effective labor share according to my research. but you get similar results.

“Second, the velocity of money is stubbornly low and getting lower.

“On the costs side, disinflationary forces from outside the U.S., such as exchange rates and import prices, play a big role. The overall stronger dollar in the last few years, in conjunction with lower import prices (Chart 6), has helped keep inflation at bay. As we’ve already alluded to, the U.S. has been importing disinflation from other major countries around the world and that helps put a lid on U.S. inflation.”

Importing disinflation is actually an important cause of low inflation in the US. The strong dollar helps to push prices lower too.

Labor cost inflation has been painfully low in the post-crisis era. The year-over-year change in U.S. unit labor costs has been negative for most of the last few years (Chart 7). This is a direct reflection of the weak employment environment and employees’ general lack of bargaining power when it comes to compensation and benefits.”

Unit labor costs is simply labor share times inflation. So it is no surprise that unit labor costs would be negative, as labor share has dropped 5% since the crisis.

“Finally, recent weakness in commodity prices presents a strong disinflationary force (Chart 8). The reasons for the recent drop in commodity prices are two-fold:  Externally, a combination of the new low-growth regime prevailing in emerging countries (particularly China) and the overcapacity issue plaguing the materials sector right now. And second, domestically, the so-called “energy renaissance” sweeping through the U.S. has greatly reduced energy prices.”

This article was the best I found that explains why inflation is low and steady not just in the US but in many other countries including Europe.


Mayger, James & Masaaki Iwamoto. Japan salaries extend slide as inflation begins to take root. Bloomberg. December 2, 2013.

Wang, Chun. Five reasons inflation is still missing. Advisor Perspectives. Leuthold Weeden Capital. November 28, 2013.